A piece of software is a revolution. You start with nothing.
You work on it for a few months. And it's still nothing. You work some more. Nothing. And more. Then, one day, it's something. Welcome to the revolution!
Groucho Marx, the vaudeville comedian, once quipped, "I worked myself up from nothing to a state of extreme poverty." In the last few years, you've probably met somebody who was unemployed, looked for a job, failed, then tried to start his own company, failed, then looked for a job some more. In Groucho's days, in the early 20th century, like now in the early 21st, both poverty and revolution co-existed. Revolutions start among the poor but they need fue
l to continue to burn: they need money. How are you going to pay for your revolution?
Self-funding doesn't mean no funding. Piles of cash, from venture capital, burns easily and brightly but, even without it, you can find other things to burn to keep your revolution lit. But, even so, you'll still need at least a little cash: if you live in the Silicon Valley, you can't ask Governor Terminator to
accept some GPL software in exchange for registering your company as a California corporation.
Look: companies need things. Every company needs a place for its people to work. Come to think of it, it needs those people, too. If it's a software company, it needs at least one computer. It needs art, advertising, Internet access, version control software and that guy in the faded Heavy Metal t-shirt who finds the best bugs. Whether a company has venture capital or not, it'll need all those same sorts of things. A self-funded company doesn't choose to need less "stuff" than other companies but it can get that same stuff much cheaper, by using substitutes, like hard work, open source software and equity, instead of cash.
A self-funded company also spends more efficiently than it would with venture capital. Self-funded companies have a lot more flexibility: to buy a piece of software, you can just run into Fry's Electronics and wave your Visa card. At a company with venture capital, the venture capitalists require an accountant to monitor the transaction to ensure that you're spending venture capital on Visual Studio to build a website (an approved expense) instead of a 40" plasma television to watch Buffy re-runs in Hi-Def (definitely not an approved expense as well as socially questionable). Comparatively, spending venture capital is like living in a Soviet bureaucracy. Or like working for the Vogons. As a self-funded company, you can save by avoiding that. And that accountant costs money, to boot.
The friction added by Comrade Accountant is unavoidable; a self-funded company trusts itself but a founder and a venture capitalist always have to check up on each other. That distrust breeds some more inefficiencies. A founder at a self-funded company might forgo salary to build his company but the same founder with venture capital will always insist on paying himself a decent salary. If the money's there, it'll be taken and spent.
The force is irresistible.
Even though they look as sober as a nuclear submarine captain, companies with venture capital go a spending spree of salaries, office space, notebook computers and software with their first check. This "drunken sailor" spending spree may result in too many copies of Visual Studio, being bought at not particularly good prices. A self-funded company isn't susceptible to that sudden flood of cash. But, as the tide comes in, it may also go out. Just when one copy of the latest version of Visual Studio would make a big difference, the company might run low on funding, an intestine-busting belt-tightening sets in and the company will deny even that reasonable and affordable purchase. Venture capital, by its nature, causes higher crests and lower troughs. A self-funded company, without these traumatic ups and downs, can plan its needs and its cash to fulfill those needs better and, so, it can simply spend better. And better equals less.
The dollar is a devil, to all companies, even those with venture capital. All companies have to fear running out, even those with venture capital. (Lack of money, rather than inefficient use of money, is what bedevils self-funded companies.) To get a sense of how many of these little devils you need, what can be substituted for what and how you'll supply your need, let's look at a list of things that all companies buy.
- Office space ($0 since you use your home)
- Computers ($0 since you already own one)
- Software development tools licenses ($0 if you are a open source penguinista)
- Business license (probably less than $100)
- Incorporation ($500 or so)
- Programmers ($0 if you do it yourself or convince others to work for equity only)
- Artists
- Services (such as website hosting, cvs hosting, bugzilla hosting)
- Recruitment ($75, $25 or $0 a pop using Craigslist)
- Advertising ($5 minimum using GoogleAds)
- Cable modem or DSL with at least one static IP address
- Books
- Lunches for employees
- Professional printing (if you are pursuing venture capital)
A self-funded company needs all these things. If you are already a programmer, you don't not need a programmer. You still need one but you hire you. You, the founder, make an agreement with you, the programmer, to write code in exchange for a huge amount of equity. It's informal. (If you're a schitzo and your personalities don't trust each other, it may require some more formal paperwork.)
At a company with venture capital, these things will cost millions of dollars. But, as you can see from the hints that I give in the list, a self-funded company can satisfy these needs by economizing, substituting and using its other assets to their full advantage. A self-funded company might spend only $10,000 or $20,000 to get all these things. A cash-strapped, living-on-Taco-Bell-taquitos self-funded company might start its revolution for under $1,000.
But where do you get that $10,000 or that $1,000?
That's financing. Before you can know how to economize or what to substitute, you've got to figure out how much money you can get. Venture capital is one financing option. Using your savings is another option. These options aren't the same, of course. With venture capital, you'll shoot to get a few million dollars; your savings is doubtlessly far, far less.
That's not the only difference. Part of getting money is what it costs to get it. To get venture capital, you'll have to surrender lots of equity and have to settle to a smaller slice of a (hopefully) larger pie. If you use your savings, you'll have less money but you'll keep most of your equity. In fact, there are a whole Pandora's box full of places to get financing, amounts of financing and compromises that go along with getting it.
To make sense of it all, we can organize financing into four basic kinds: Spare Time, Savings, Friends and Family and Venture Capital.
Spare Time financing is using a regular job (such as contracting) to support your self-funded company.
The upside is that there is little risk that you'll go personally bankrupt if the company fails. The downside is that it takes a huge personal effort and commitment and developing software in your spare time is so slow that you'll feel like an old geezer when you're done. But you also keep most the control and equity of your company so you can enjoy your geezerdom: you'll keep 55% to 95% (compared to 10% on average for Venture Capital financing).
Savings financing is a way to sort of be your own venture capitalist: you, the investor, invest your life's savings in you, the founder. But you (both of you) take a huge risk and work against a run-out-of-money-and-you're-dead timeclock.
Friends and Family financing is working on your self-funded company while your wife Marge supports you with her real job or you live off your rich uncle Monty's cash.
Venture Capital financing is paying yourself to spend somebody else's money.
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You may wonder: "What about using a combination?"
A combination, like choosing a Taco Bell Big Bell Value Meal, is a great way to get the best of everything (well, at least, the best of everything at Taco Bell, muchacho) while minimizing the downside. You might work for 3 to 6 months in your spare time to attune yourself to hard work and reassure yourself about your commitment and capability regarding the new company. Then, you could bring another programmer who works for 5%-10% of the equity while you do a fulltime nine-month blitz to finish the 1.0 development fast while living on your savings. (The deadline of nine months will help keep you focused.) Once the clock runs out at nine months, you'll get another job to refill your company's treasury and ramp up sales until they can support you. By interleaving full-time work between periods of spare time work, you can mix a cocktail that speeds up development (just when development is in full swing) while disarming the run-out-of-money-and-you're-dead time bomb of using your savings.
So, now, you know what spending is. You know what financing is. You combine your choices in spending and financing, together, to form your Big Money Picture.
Your Big Money Picture
is how all your money choices work together to make your company succeed. You don't want to run out of money. You don't want your company to grow slowly. You don't want somebody else to get all the rewards from all of your efforts. Your Big Money Picture shows how you avoid all these things, at the same time; it has to consistent and make sense.
A sensible Big Money Picture has to balance three things:
- where and how you get cash
- how you economize and what you spend
- how much equity you have at the end of it
Your Big Money Picture shouldn't show you as a Scrooge who spends $1,000 with a lot of equity but very, very slow product development. Nor, should your Big Money Picture have you spend $10,000 to buy software development tools licenses and then lose interest in finishing the product. Your Big Money Picture has to be an optimal, realistic view of how much money you can get, what you will use that amount of money to buy and how much financial reward that your company will bring.
To make your Big Money Picture, make your shopping list from the bullet list in the first half of the article and make your choice(s) from the Financial Scorecard. Is it going to work? Do you believe it? Will the rewards be worth it in the end? Re-work your Big Money Picture choices until you find the optimal solution.
The more sense that your Big Money Picture makes, the more successful your revolution will be.
E-mail Dan Howard about this article
